Bond Market Forcing Fed's Hand

With US markets closed today, the only action is with bonds, and the concern is that rates will continue to rise. The Fed likes to present an aura of omnipotence, but the bond vigilantes can force its hand. The Fed has kept short rates low, but the market drives longer rates. As the Fed has been ending its QE policy, long rates have gone up. 

Pacifica Partners notes rates have moved much faster than most market participants have recognized: up 90% since the 10 year Treasury hit 2% a little over a year ago, and a spike up in December concurrent with a bottom in the Dollar (see chart):

 

Barron's notes that since Thanksgiving, the 10-yr yield has gone up 20%, and appears to be on the verge of a big breakout. They point to a bullish flag, which has broken to the upside.

 

The current tumult in the bond market (see my ObamaCare Spooked Bonds post) seems to be caused at least in part by a supply imbalance with Treasuries. US households are back to spending again, so they won't cover. European buyers are pulling back to solve their own Greek tragedy. Social Security is going into deficit, which means instead of buying Treasuries they will be a net seller. They used to cover a huge percent of our deficit (50%). 

The big buyers, China and Japan, appear to be headed for the door, often by trying to hide the sales by funneling through proxy accounts. Their obfuscation makes it somewhat difficult to figure out if they have been selling, but given that China may report a trade deficit in Q1, the capital flows almost require them to be lightening up. ZH has estimated a $300-400B differential between forex holdings and Treasuries, one measurement of their selling. When rates turned in December, China began selling, visibly. ZH speculates that instead of selling, they are letting shorter-term Treasuries mature, and not buying anew. One columnist who says not to worry believes they are letting short term bills mature and then buying longer-term bonds. He also thinks the official TIC accounting may be missing some transactions, particularly if China obfuscates what it is doing. In any event, TIC measurements makes it clear that foreign flows into Treasuries have been dropping:

 

Normally forex holdings track trade flows. China has to hold a bunch of US assets to manage their Dollar trade, and to keep their currency pegged at a cheap level, has to hold an excess to "sterilize" the exchange of their currency inside China for Dollars. During the Great Recession, global trade dropped, and with that the need for the same high level of forex holdings of Dollars. Significantly, Dollar holdings dropped more than trade. This puts pressure on rates to rise, since due to less trade there are fewer foreign Treasury buyers. 

 

The Keynesian cheerleaders for fiscal stimulus interpret the steep yield curve in the normal way, as signaling a recovery ahead. I discuss this in my The Logic for Bonds post. Normal steepening is due to increased demand for longer-term commercial loans, which we still do not see. Instead, we see a rush to float junk bonds. Sometimes the yield curve steepens due to inflationary fears, but the inflation-adjusted Treasuries, TIPS, still have a mild spread vs. Treasuries. Likely the steep curve is due to artificially low short rates, and long rates creeping up due to the supply imbalance. 

The most interesting argument is that the private sector has pushed their own risk onto the public sector (TARP, Fed buying toxic debt, etc.), and now may turn on the chumps saviors. As Bruce Kasting puts it:

With the end of QE the cycle is now complete. The maximum amount of risk in the form of credit exposure and aggregate debt has now been passed to the public sectors around the world. As markets are wont to do, they are likely to turn on their benefactors now that they have succeeded.

Comments

[Wave Rust]

Surprise! to all you deer caught in the headlights!

Another rate hike in sea of exhuberant bears and bulls. :)

USD rocket ,,, all aboard?

FOMC surprise meeting on Monday, April 5th at 11:30.

Never fade the Fed

[MHD]

Hockthefarm.... interest have not gone up because of fear, and the Feds printing money to provide enough demand to keep the rates at the level they want. If, however, the bond market really wanted the rates higher it could easily do so. Nothing is bigger than the bond market. If interest rates do go to more normal levels, should be interesting to see how strong the economy really is!

[Mamma Boom Boom]

Wave Rust, you sound like Tarzan of the Jungle. Pound your chest and tell me where you heard the rumor.

[MHD]

With the 3 month t-bill at .16 the feds don't need to do anything.

[newbietrader]

Mamma Boom Boom

Go to Zero Hedge and you'll see the notice of the emergency fed meeeting

[Wave Rust]

http://www.federalreserve.gov/boarddocs/meetings/

[Mamma Boom Boom]

Thanks guys. I had read that earlier, but didn't interpret as a rate hike.

[Wave Rust]

Monday should be fun.

Sunday night's USD and US index openings in Oz and Tokyo should be a hoot.

Dollar rallies, index rallies. The top is in!??? Not!

Like I said before, Long Easter ,,, etc.

Happy Easter to all here.

wave rust

P.S.

Well, I've got to run to keep from hiding
And I'm bound to keep on riding
And I've got one more silver dollar USD
But I'm not gonna let them catch me, no
Not gonna let 'em catch the midnight [bull] rider

[Stevew333]

Hi Yelnick,
It seems like your 3rd and 4th graphs aren't uploading. Or is it something on my end?

[Mamma Boom Boom]

>Not gonna let 'em catch the midnight [bull] rider<

Who was playing lead, then?

[Hockthefarm]

Ya gotta sit back and laugh every once in a while!

From the EWFF:

If you started spending a million dollars a day in the year 1 A.D., today you would have spent less than a trillion dollars. Obama's 12 month rolling deficit is currently 1.5 trillion $.

The average price of a Shanghai home fell 10 percent in the first week of March. No, that is not a year over year comparison, its in the space of 1 week.

May you live in interesting times indeed,
Hock

[nspolar]

Bears, Elliott Buffs, Elliott Idiots, maybe even bulls. A suggestion is that it might pay off to look around a bit, at other indices for example. What is obfuscated within one index, may not be in another. And I do like ole Richard Russel. He has been around a long time, and is a man that enjoys what he does. Gotta admire that. So I do follow other indices, the Trannies being one. I think RR has some valid viewpoints about this.

The Trannies imo topped in early 2008, in a five wave up move that seems to be relatively clear. See chart.

http://img52.imageshack.us/img52/4761/1004021tranlt.gif

Following the top the Trannies went down, in a pattern that still holds question marks as to whether it was an abc for a A leg of an ABC yet to complete; or a i,ii, iii yet to complete, or an ABC completed. The door is still open to all those possibilities. And how about that vth wave triangle at the end ... how many saw that in the DOW or SPX ... well it is there in those too.

http://img256.imageshack.us/img256/5806/1004022tranadown.gif

So coming off the bottom what can we expect. A corrective wave (iv or B) or even an impulse. This chart shows some of the possibilities, and favors a 535 ZigZag about to complete, for a probable B. If this favorite comes to pass, the Trannies can not go much higher, as shown, or the count is violated and wrong. A few more days will tell the story. I sense the bears are at wits end here. Especially the poor poor Neelyites.

Why the 14th plus/minus for a possible trend change .... embedded in the stars man.

http://img515.imageshack.us/img515/3046/1004023tranbup.gif

Now in regard to entropy, my view is completely different than Yelnicks. Entropy is a point property yes, but it is used in thermodynamics to quantify whether or not a process between points A and B on a physical properties chart 'can' in fact happen. If no work is added, the entropy must increase, in the process from A to B. Pressure being reduced across a valve is a good example, i.e. the J-T effect. I posted a very good scientific article that states that disorder and order are subjective viewpoints, and entropy does not have anything to do with telling us about these issues. It is my opinion this is true, and that from a wave perspective, order is in fact increasing here. Why? Because soon we will have some answers to what is possible or otherwise, with respect to a few key wave count possibilitie. As more possibilities are ruled out, fewer remain. But that is my subjective view.

ns

[nspolar]

Sarah Palin on Obama's Drilling Plan.

http://corner.nationalreview.com/post/?q=NDE2MjU4NzdkNzQxZjA3MDE4NmFjMjYxZTU4NDQxN2Q=

I'm with you Sarah, "Drill, Baby Drill!" No more stallin.

http://4.bp.blogspot.com/_kApto83SZK4/SP6N13FYMuI/AAAAAAAACFE/goHBkPNAgJc/s400/sarah-palin-vogue-magazine.jpg

And have you peak oil advocates read about how big the Marcelus is? Might even have a shot at being the biggest gas field in the world. Already way up there.

http://www.iogawv.com/pdfs/Wrightstone_IOGAWV_012010.pdf

And you know what about The Shale plays as well as The Bakken? All developed with venture capital. No not the big boys. The little guys, who work with their own money. Now The Big Boys want in. So what happens in the best capitalist type industry a going? The big boys start piling in, cuz they want some of that action, and then Obama opens a few more areas, and then viola ... we have drilling and more driling and foreign investment coming into the US OF A exploration industry. Already happening.

Cheap energy is going to come again, to fuel the move up off a final bottom.

Drill Baby Drill.

ns

[DG]

nspolar,

I take it you don't agree that wave 2s should always take at least as much time as wave 1s and wave 4s should always take at least as much time as wave 3s.

Can you explain why those rules are invalid?

What time rules would you substitute for those and why?

Also, is it really your contention that a ~40 year Impulse pattern will be "corrected" by a 3 or 4 year Corrective pattern? If so, doesn't that seem in the least bit odd to you that two patterns of the same Degree would differ in time by a factor of ~10?

[DG]

"I sense the bears are at wits end here. Especially the poor poor Neelyites."

I can't speak for anyone else but I'm in no way at my "wits end". I would like the market to turn down but given that we're in a wave-(B) I'm not surprised that the rally is taking longer than I'd like since that's what wave-(B)s do. My current read on wave structure can accommodate a move much higher from here.

http://yfrog.com/1gspxweekly5p

[nspolar]

Blog,

I wanna show you an impulse, an impulse that is utterly amazing. Is it nearing an end? Maybe?

http://img517.imageshack.us/img517/899/100402aapl.gif

Now look at Wave iii or is 3 or is it III, still in progress. Look closely, and figure out the labeling. Now we know the Neelyites missed it (the 3rd that is) ... why ... hells bells... they are still waiting for wave i of 3 to end, in the meantime this sucker left em scratching their rawls! How do I know this. The Hand just told me so. He always tells the truth.

LMAO.

And then we have all this negativity in the US of A, what with real entreprenuers like Jobs floating about, and AAPL doing this huge frigging impulse in the middle of all this. And the Marcelus. Only in America.

As Sgt. Oddball would say, 'Why are you always so negative man?"

http://blogs.theage.com.au/schembri/kelly.jpg

Now what is the moral of the story here? Imao it is when things impulse, within a standalone 5 wave, whether it be a 1 or a 3 or a 5 (no degree insinutated), they spend most of the time impulsing.

And things gotta wave!

But the Neelyites spend all their time looking for abcde's ...abcdefg's .... ad infinitum. And if one don't fit well they add another. Soon they will up to 17 wave corrective patterns. Going to have to develop a new alphabet for em, else they will run out of letters.

LMAO.

Never Talk To The Hand.

Listen To What The Hand Tells You.

The Hand Just told all of you this Big B we supposedly in is going to continue way up yet!!! Much higher so says The Hand. I love it man.

We see you again on the 14th!

Wuf! Wuf!

ns goes to bed now, with his dogs, out in the bush. It is a 3 dog night here yet. But the view is great.

http://www.hickerphoto.com/data/homepage/146/T4587.jpg

ns

[vipul garg]

ns,
brevity is the soul of wit.

[DG]

ns,

Yes, there are so many entrepreneurs like Jobs that I'm sure you can find a huge number of charts that look like Apple's right? You do realize that wave theory rarely applies to individual stocks, right? And your AAPL wave analysis can't possibly be anything other than a joke, right? You expect us to use the conclusions from an arithmetic chart for a stock that has increased almost 10X from it's unadjusted price bottom? That's the kind of long-term movement for which log charts were invented.

http://yfrog.com/juapplecp

Again, your objections seem to boil down to "I don't like your rules, so I'm going to throw down wave labels that fit my bias". OK, great, only that's not wave theory. I'm not quite sure what your problem is with all the stupid words, phrases and nonsensical links, but whatever it is it's not helping me find an objective reason why I should take anything you say as being even remotely accurate analysis.

[DG]

I should also add that wave-(B) doesn't necessarily need to be part of an Irregular Triangle and could also be part of an Irregular Flat with that size relationship to wave-(A). We'll need to see how wave-(C) shapes up.

[Glenn Loser Neely]

Where is DG?

Is he having fun with his boyfriend Neely this weekend?

I bet DG is short the dollar, he is so idiot...!!
wait for monday and he will be back... in the bad mood and broke.. he will
have to work and extra shift at his mc donald's job to recover his 50 dollars..

Glenn Loser Neely

[MHD]

More evidence of deflation? My dentist didn't raise his prices this year as he usually does. I've been going to this dentist for a long time and this has never happened.
Very interesting!!

[trendlines]

Hello Yelnick & folks,

Just posted a Shanghai Composite Long Term chart, if you're interested:

http://trendlines618.blogspot.com/2010/04/shanghai-composite-long-term-count.html

[nspolar]

trendlines, enjoy your charts cus there are nice.

w/r to China I am following this possibility:

http://img36.imageshack.us/img36/5412/100404djchina.gif

I too think there are more triangles these days.

ns

[yelnick]

stevew333 - thanks for the heads's up. The charts are back

[Hockthefarm]

Interesting thoughts from Mauldin on what to expect for the next 5 to 10 years:

http://www.safehaven.com/showarticle.cfm?id=16310&pv=1

Seems to me the winners will be folks that sit in the cash patch (i.e. keep what you have).

It is also time to save. If Obama and Bernanke haven't scared you into saving every dime you earn for the next 5 years, nothing ever will.

Finally, Obama has shown us there is no relationship between government spending and tax revenues. We should use the polls to demand massive tax cuts over the next 5 years. At some point someone other than teachers will get laid off and at some point government pensions will follow the private sector and be self funded. You have to think the media will pick up on this at some point in the next few years.

All in, I'm still giving the nod to Prechter and Dent. The real squirming is set to get under way shortly. Big structural problems that won't go away with massive increases in debt.

Hock

[Chabazite]

Thanks for the interesting chart DG (the one showing that the rallies are slowing), which adds to the debate. But I think maybe its too early to call this third up wave?? Time will tell.

[DG]

"Thanks for the interesting chart DG (the one showing that the rallies are slowing), which adds to the debate. But I think maybe its too early to call this third up wave?? Time will tell."

I'm not calling it a wave-3 up, though. I don't see any reason to think this wave has been an Impulse at any Degree because there is way too much overlap and no clearly extended wave on a non-arithmetic chart. Right now, I think it could be the third :3 in a Triple Combination, though, like this.

http://yfrog.com/9gspydailyapril1p

[Kevin]

DG, what is the address of your blog. I'm a member but my hard drive crashed and I no longer have the address.

[DG]

Kevin,

Tough luck with the hard drive. Here you go

http://dgtradingblog.blogspot.com/

[CrisisMaven]

Rates will rise, triggering two equally disastrous developments: first, even more under-water or defaulting home-owners than what began the crisis due to adjustable rate mortgages resetting, then sovereign defaults including the US due to unsustainable amounts of interest owed on new debt. By the way, I just mentioned your blog in my recent post Blogs and Web Sites you may want to follow. For your own investigative work you may also want to check out my Statistical Reference List with links to hundreds of thousands of statistics, indicators, time lines etc.

[Hockthefarm]

CM:

I poked around in a few of your urls. Pretty gloomy stuff.

Found this from Weiss:

http://www.moneyandmarkets.com/transcript-nine-shocking-new-predictions-for-2010-2012-7-38096

I think you will find that he was blowing the same horn back in the 90's. Not that it matters. The mess we are in is real. I just don't think people grasp it yet. A trillion dollars. I don't think Obama has any idea just how much money that is.

Hock

[EW]

,n,m,